Reyes vs. Court of Appeals

The degree of diligence required of banks is that of a good father of a family in commercial transactions that do not involve their fiduciary relationship with depositors; the highest degree of care applies only when banks act in their fiduciary capacity as depositaries. Because the sale and issuance of a foreign exchange demand draft involves a buyer-seller relationship rather than a fiduciary one, the issuing bank is required to exert only the diligence of a good father of a family.

The Philippine Racing Club, Inc. (PRCI) sought to remit Australian dollars to the 20th Asian Racing Conference Secretariat in Sydney. Because respondent Far East Bank and Trust Company lacked an Australian dollar account in Sydney, the parties agreed to a roundabout remittance arrangement: the respondent bank would draw the draft against Westpac-Sydney, which would then reimburse itself from the respondent bank's U.S. dollar account in Westpac-New York.

• Application for Demand Draft: PRCI representative Godofredo Reyes applied for a demand draft of AU$1,610.00 with respondent bank. Bank assistant cashier Yasis explained the roundabout remittance arrangement via Westpac-Sydney and Westpac-New York. Godofredo agreed to this procedure on behalf of PRCI and petitioner Gregorio H. Reyes.
• Issuance and First Dishonor: On July 28, 1988, respondent bank issued Foreign Exchange Demand Draft (FXDD) No. 209968. On August 10, 1988, upon presentment, Westpac-Sydney dishonored the draft, stating "No account held with Westpac." Respondent bank subsequently sent messages to Westpac-New York to re-confirm the reimbursement authority and ensure Westpac-Sydney was covered.
• Second Dishonor: On September 14, 1988, upon second presentment, the draft was dishonored again for the same reason. The appellate court found that the root cause was Westpac-Sydney's erroneous decoding of the SWIFT message format as "MT799" (letter of credit) instead of "MT199" (demand draft), causing the message to be routed to the wrong department.
• Embarrassment in Sydney: Petitioners Gregorio and Consuelo Puyat-Reyes arrived in Sydney for the conference on September 17-18, 1988. At the registration desk, they were publicly informed that the draft was dishonored, causing them severe embarrassment and humiliation. Gregorio eventually paid the registration fees in cash.

• Petitioners maintained that the Court of Appeals erred in applying the standard of diligence of an ordinary prudent person, arguing that the fiduciary nature of banking imposes a higher degree of diligence upon banks even in commercial transactions.
• Petitioners argued that the respondent bank violated Section 61 of the Negotiable Instruments Law by breaching its warranty as drawer that the instrument would be paid upon due presentment.
• Petitioners contended that the dishonor was due to the respondent bank's negligence and not the drawee bank's error, urging the Court to re-examine the factual findings to cite instances of such negligence.

• Respondent bank countered that it exercised the required degree of diligence and that the dishonor was caused by Westpac-Sydney's erroneous decoding of the SWIFT message, an event that could not have been foreseen.
• Respondent bank asserted that it did everything necessary in the ordinary course of banking to facilitate the transaction, including promptly sending SWIFT messages to authorize reimbursement and inquire about the dishonor.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the Court of Appeals erred in applying the standard of diligence of an ordinary prudent person instead of the higher degree of diligence required of banks.
  • Whether the respondent bank is liable for damages for breach of warranty under Section 61 of the Negotiable Instruments Law.
  • Whether the dishonor of the demand draft was due to the respondent bank's negligence.

• Procedural: N/A
• Substantive:
  • The Court of Appeals did not err. The highest degree of diligence applies only when banks act in their fiduciary capacity as depositaries of depositors' funds. In commercial transactions like the sale and issuance of a foreign exchange demand draft, the relationship is that of buyer and seller; thus, the required diligence is only that of a good father of a family.
  • The respondent bank is not liable for breach of warranty under Section 61 of the Negotiable Instruments Law because the dishonor was not attributable to any fault of the respondent bank. The bank acted in good faith and did not cause the embarrassment.
  • The dishonor was not due to the respondent bank's negligence. The bank did everything within its power to prevent the dishonor. The erroneous reading of the SWIFT message by a Westpac-Sydney employee could not have been foreseen. Furthermore, petitioners are estopped from denying the roundabout remittance arrangement they explicitly agreed to, which established that the drawee bank was not directly holding the respondent bank's funds.

• Degree of Diligence Required of Banks — Banks are required to exert the highest degree of diligence in treating deposit accounts due to the fiduciary nature of their relationship with depositors. However, this higher degree of diligence applies only when banks act in their fiduciary capacity as depositaries. In commercial transactions that do not involve this fiduciary relationship, banks are required to exercise only the diligence of a good father of a family (or an ordinary prudent person). The Court applied this doctrine to hold that the issuance of a foreign exchange demand draft is a commercial transaction involving a buyer-seller relationship, not a fiduciary one, thereby requiring only the diligence of a good father of a family.

• "the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned... But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors."

• Philippine Bank of Commerce v. Court of Appeals, 269 SCRA 695 (1997) — Followed. Established the doctrine that the highest degree of diligence is required of banks only in their fiduciary capacity as depositaries, not in all commercial transactions.
• Borromeo v. Sun, 317 SCRA 176 (1999) — Followed. Cited for the rule that factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court in a petition for review under Rule 45.

• Section 1, Rule 45 of the Revised Rules of Court — Provides that a petition for review shall raise only questions of law. Applied to emphasize that the factual findings of the Court of Appeals are conclusive and not reviewable by the Court.
• Section 61, Negotiable Instruments Law — Provides the warranty of the drawer that on due presentment, the instrument will be accepted or paid according to its tenor. Petitioners invoked this provision, but the Court held that because the bank acted in good faith and the dishonor was not its fault, a discussion of its application was unnecessary.

Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.